Fed: Four hikes in 2016? - Rabobank

FXStreet (Delhi) - Philip Marey, Senior US Strategist at Rabobank, suggests that while the dot plot released in December implies four rate hikes of a quarter this year, we have argued before that the downside risks to the Fed’s rate projections are larger than the upside risks and therefore we think they will only hike twice.

Key Quotes

“The minutes of the December meeting reveal that in particular the downside risks to inflation were already a concern to some members of the FOMC. Recent developments are not likely to have eased their concerns. In fact, we have pointed out before that if the recent decline in the oil price is not reversed, year-on-year oil price changes in the coming year will continue to drag down the headline inflation rate for the US. What’s more, any further dollar appreciation would slow down the rebound in core inflation. Finally, we think that excessive amounts of discouraged workers and involuntary part-time workers will continue to hold back wage pressures.

To make things worse, we would also like to emphasize that there are also several downside risks to the pace of the economic recovery. First of all, the strength of the US dollar continues to be a major headwind for exporting firms, as shown by the further deterioration of the ISM manufacturing index. Secondly, the global economy continues to be weak. What’s more, the downside risks to the Chinese economy going forward may very well be underestimated by the FOMC.

While recent Fed speakers continue to be complacent, we have our doubts about both the inflation outlook and the pace of the economic recovery, and consequently also about the four rate hikes that the Fed intends to deliver this year.”
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